What is Actuarial Services Insurance?
Actuarial service is a type of financial service utilizing quantitative and qualitative modeling. Actuarial firms study the economic aspect of risk of an insurer and play a consultative role. Actuarial experts determine the risk type and assess its immediacy and magnitude. Their end goal is to balance the inflow of premiums against outflow of claims and expenses. Actuaries devise a plan that examines the effects of a threat and evaluates its financial impact. A formula is created by using mathematical and statistical models to predict probabilities of claims.
Actuarial services help insurers to price their products effectively. The more risk-sensitive a model is, the higher the price efficacy of its products. The higher its price efficacy, the more operationally accurate a product is.
The US Insurance Consulting and Actuarial Services market size in 2021 was $8.3 billion
Business and Professional Risks
The effectiveness of actuarial models allow insurers to protect their revenue by charging correct premiums for a clients' risk exposures. Like any other business, it is challenging for insurance companies to maintain profitability if their products are not correctly priced.
Actuarial consulting companies compute the financial impacts of insurance companies' operating risks. Unlike insurance underwriters, an actuaries’ tasks are more theoretical in nature, constructing a financial model that insurance companies can use. An erroneous model is as much a risk for an insurance company as it is for the actuarial service provider. Insurance companies face the risk of inaccurate models that fail to capture the accuracy of premiums charged for insurance policies. Let's consider some of the threats actuarial consulting firms are exposed to:
- Erroneous actuarial models: These models result from flawed assumptions of loss or sensitivity in capturing an insurer's risks. Unsound models cause ineffective pricing of products, making it difficult for an actuarial firm's client (an insurer) to operate profitably.
- Substandard quality of report: Failure to deliver precise qualitative analyses to the client. This can negatively affect a client’s business revenue, at times, severely.
- Alleged negligence: The actuarial data given to an insurer can result in an operating loss. The client can sue for damages for professional negligence.
- Property damage: Office and computer equipment damaged due to fire and other insured perils.
- Cyber threat: Phishing emails from cyber criminals can lead to wrongful access of information such as customers' and employees' passwords and credit or debit account information.
Effective actuarial services insurance policies can protect actuarial consultants and firms from the day-to-day threats of running their operations. They can consider the following insurance policies:
General Liability Insurance
This policy protects actuarial services from third-party claims. Bodily injury, property damage, and personal and advertising injury are the types of coverage included. Claims or lawsuits for economic loss, pain and suffering arising from the actuarial service's operations are covered. The general liability insurance company provides legal defense and pays for covered claims.
- Bodily injury: A power outage in the office causes a client to trip and fall. The general liability policy will respond to the claim by the injured party.
- Property damage: Coffee spilled on a client's new laptop while in the office - general liability insurance will pay the client's property damage claim.
- Advertising injury: Harm caused to a third party from libel, slander, or advertising committed by the insured.
Professional Liability or Error and Omissions Insurance
Professional Liability also referred to as E&O insurance protects actuarial firms against clients' allegations of negligence, mistakes, or omission in services provided. It covers actuarial firms for financial losses incurred by its clients caused by the firm’s negligent professional conduct. In each of these situations, the Error and Omissions insurance would respond with defense and payment for covered claims:
- Professional misrepresentation: Policy premiums based on actuarial data resulting in inaccurate higher premiums, caused the insurer to lose many clients to competitors.
- A professional mistake: An insurer client realized record losses exceeding all loss forecasting data provided by the actuarial firm's model.
- A breach of contract: When the actuarial firm missed a deadline or has not delivered something as promised (late delivery or incomplete work delivered).
Workers’ Compensation Insurance
This policy protects actuarial consulting companies from the liability from on-the-job employee injuries or work-related death of an employee. Depending on the situation, workers’ compensation insurance will pay employees' medical costs and a percentage of wages lost when unable to work.
- Repetitive Stress Injuries due to computer usage at work: These common occupational hazards usually lead to excruciating neck pain, which may require further treatment, physiotherapy, and rest for a few weeks. The policy pays the statutory benefits to the employee for injury claims.
Commercial Auto Insurance
Commercial auto insurance is recommended to provide statutory auto coverage and more if an actuarial consultancy firm owns a vehicle. Bodily injury and Property Damage Liability, Comprehensive and Collision on owned vehicles, Medical Payments, Personal Injury Protection/No-Fault, and Uninsured Motorist coverage are all available on a Business Auto Policy.
- At-fault-accident: This policy takes care of the legal liability for bodily injury and property damage caused by the actuarial company vehicle's at-fault driver.
- Damage to owned vehicles: Collision coverage pays for repair or replacement of the insured's vehicles less the deductible on the policy.
Let's suppose an actuarial service firm's clients' information gets breached due to a hack, a phishing email, or any other cyberattack like a virus or a malware attack. Under such circumstances, they can expect a large claim or a lawsuit from a carrier that could quickly get prohibitively expensive. This policy would respond to the insurer's claim or suit if the data loss caused a financial loss.
- Lost data: An actuary (employed by an actuarial consulting company) may leave his computer on a crowded train. The laptop has clients' private information on its hard drive. Under such circumstances, a lawsuit filed by its clients may bankrupt the actuarial service. Cyber insurance addresses the costs related to any lawsuit that might follow.
- Cyber Hack: When cyber criminals strike, there are very few options on the table for mitigating risks, especially of legal and financial nature. Cyber Insurance can be the remedy to the problem of costs related to website recovery and data integrity. In the meantime, cyber liability lawsuits can be dealt with.
Overall Insurance Costs
The cost of the right insurance policies to protect an actuarial service business is based on the business's revenue, payroll, location, number of locations, limits purchased, and claims history. These exposures determine the premium calculation for various insurance types. The types of policies needed based on the business's operations also contribute to the cost of the establishment's policies.
A robust set of insurance policies purchased by a business goes hand in hand with its loss control and risk management practices. While an actuarial consulting company connects its human resources, operations, and business assets with its products and clients, a well-chosen set of insurance policies builds a security fence around the entire business establishment. Stakeholders thereby remain assured of business continuity, even amidst uncertainty.